Keillen began his property fund management career at Standard Bank Properties in 2004 managing its leveraged listed property product. He became a listed property analyst at Stanlib in 2005 and now also co-manages the Stanlib Aggressive Income Fund.
STANLIB Property Income Fund - Sep 18
Over 3Q18 the fund outperformed the benchmark by 1.0%. Over the past quarter, the top contributors to fund performance were the underweight positions in Growthpoint and Attacq and the overweight positions in Investec Australia and Nepi Rockcastle. Attacq continued to see negative share price performance from what was, in our view, an overvalued price. Growthpoint was driven lower by a continuing weaker SA outlook manifesting, while Investec Australia benefited from the expectation of an Australian listing in the medium term. Nepi Rockcastle continued to see and benefit from strong fundamentals in its operating regions. The top detractors to fund performance were the underweight positions in Emira and Fortress-A, with investors continuing to seek the safety of Fortress-A while seeing reduced risk in Emira, post recent shifts in its portfolio weightings.
On a total return basis in 3Q18, listed property (-1.0%) underperformed local bonds (+0.8%) and cash (+1.7%), while outperforming local equities (-2.0%). A 15bps weakening in the SA 10-year bond yield in 3Q18 marginally impacted the sector over the quarter, but a weak outlook from Growthpoint, a sector heavyweight stock, saw it fall -9% in the quarter. Currencies saw marginal shifts as well over the quarter, with the ZAR weakening 3% versus the US$ and 2% versus the EUR over the quarter.
SA Property Index (SAPY) stocks with double-digit positive performance in 3Q18 were limited to three counters, namely EPP (+18%), Fortress-A (+15%) and Equites (+14%). These stocks reflect a preference by investors for certainty in earnings and offshore exposure, with many of the other better performing stocks in 3Q18 also reflected an offshore earnings dynamic. Stocks with a significant SA portfolio element struggled to perform well in a deteriorating SA outlook, with Growthpoint (-9%), Hyprop (-6%) and SA Corporate (-6%) reflecting this dynamic. The quarter was also characterised by weaker outlook statements from many companies with material SA exposure, such as Rebosis (-13%), Attacq (-9%), Accelerate (-11%) and Arrowhead (-6%).
We find the local economic environment remains challenging and we do not expect a material improvement in operating conditions in 2019. Risks could potentially still be to the downside, if GDP growth does not show a market improvement in the medium-term. Earnings from companies with offshore exposure and reasonable GDP growth fundamentals are likely to outstrip growth from SA companies with property portfolios that are largely SA exposed.
Effective 1 October 2018, we have shifted the benchmark for the fund to the All Property Index (ALPI). Over the next 12 months, we anticipate 5-6% distribution growth for the ALPI, with the potential that weakening ZAR dynamics could imply even higher ALPI dividend growth. SA listed companies with significant offshore exposure should in aggregate continue to exhibit double-digit distribution growth in ZAR, over the next 12 months. The ALPI currently offers a forward yield of 9.1%, which is above the SA 10-year bond yield (9.0%) and represents what we believe remains an attractive entry point into property that discounts in large part the anticipated and continued income growth of the sector. Having done in-depth analysis, we expect fundamentals reflecting dividend growth and asset quality in stocks such as Resilient and Nepi Rockcastle to reassert. Over the next 12 months, we expect listed property to deliver double-digit returns and believe the current entry point is attractive.
The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur
The STANLIB Property Income Fund aims for the growth of capital and to provide an income source. Investments may consist of property shares, property loan stock, debentures, debenture stock and bonds, unsecured notes, property unit trusts and other listed securities considered consistent with the portfolio's objective. Liquidity may be increased to 50% if deemed necessary by the manager. Exposure to fixed-interest securities is limited to 30%. The portfolio may also invest in the participatory interests of collective investment schemes. This portfolio may not have any direct and/or indirect foreign exposure.